Wednesday, June 24, 2009

Understanding Your Royalty Statement—Part II

As I mentioned before, royalty statements can be confusing to read, but it’s in your best interest to become familiar with them. In general, the larger the publishing house, the more confusing the statement. On the other hand, big publishing houses also give more information, which can be helpful. Because statements vary so much, you may or may not find some of the elements I’m about to discuss. Know that if you ever have any questions about your statement, your agent or editor will be happy to help you make sense of it.

Know Your Editions

Most books are published in several different forms, so you will often find separate listings for each edition of the book. For example, we’re all familiar with the hardcover and paperback editions. Did you know, however, that paperbacks are divided into two categories? There are the fancy, larger-sized, more literary-looking trade paperbacks and then there are the cheaper, drugstore variety mass market paperbacks. Most hardcover books become one or the other, unless you’re a mega-bestseller, in which case you might become both.

Other editions you might find on your statement are library editions, large-print, electronic, and audio books. Your publisher may or may not control the rights to these editions (look at your contract to know) so you may or not find them on your statement. If, for instance, your agent sold the audio rights to another company, you can expect to receive a separate statement from that company.

Check the Contract

When you receive your first royalty statement, it’s important to have your contract open and to compare the details with those on the statement. Is the pub date correct? Is the advance correct? Do they list the correct royalty payout (very important)? Is the retail price correct? If any of these numbers are off, it will affect your bottom line.

Units Vs. Earnings

Your sales are represented in two ways: units and earnings. Units are the number of books sold and earnings are your monetary share of those sales. For example, if you sell 100 books at $20 each and your royalty is 10% of sales, your earnings are $200 (100 x 20 x .10 = 200). Therefore, under the heading “Units” you’ll see 100 and under “Earnings” you’ll see $200.

On your first few statements, the number of units sold will be a pretty decent number. DON’T GET EXCITED JUST YET. Now is not the time buy a boat or head to the nearest watering hole and buy everyone a round of drinks. The units sold on your statement is actually the number of books purchased BY BOOKSTORES and not by consumers. For example, a Barnes & Noble might say, “Sure this looks like a good book—we’ll put five copies in each store.” This purchase is what you see on your statement. The catch is that if Barnes & Noble doesn’t sell those copies, they have the option of returning them to the publisher for a refund. This is why your publisher will occasional hold back a percentage of sales, called a “Reserve for Returns” until a certain amount of time has passed (more on this here). For the first several royalty statements, you’ll see all kinds of sales, and then after a few accounting periods have gone by the returns will kick in and you’ll start to see negative units (unless, of course, you’re Stephenie Meyer). It’s a discouraging sight, but take heart—it happens to most authors.

As far as earnings go, it’s important to remember that just because there were sales, it doesn’t mean you’ll be seeing a fat check anytime soon, due to that pesky thing called an advance. Advance is short terminology for “Advance Payment Against Royalties,” meaning you won’t see a penny of your royalties until you “earn back” your advance. Any amount above the advance is your true royalty. The nice thing about an advance though, is that you get the money up front and if you fail to earn enough to equal your advance (also known as “earning out”) you still get to keep it.

Be Aware of Escalations

Many contracts contain different royalty percentages, depending on sales. For example, the publisher might agree to pay you 10% of sales for the first 10,000 copies sold, 12% for the next 10,000, and 15% thereafter. This is called an escalation. If your contract contains an escalation, it is very important you pay attention to the number of units sold, and that the royalty percentages escalate properly.

Cumulative Units and Earnings

The cumulative columns are the most important part of your statement. This is where you’re going to find mistakes, if there are any. The cumulative columns show the total units sold to date and the total earnings to date.

This is where you need to do a little math. When you receive your second royalty statement, add the units sold with the units from the first statement and make sure it agrees with the cumulative units on the second statement. Do the same with the earnings. If you have an unearned balance from your advance, you’ll also want to subtract cumulative earnings from the initial advance to make sure the balance is correct. It sometimes helps to keep a small ledger of just statement dates and unearned balance amounts, since this is the most important number to know.

Next Time--The Multi-Book Contract: Is It Worth It?